January's VAT rise will prove the true test of retailers' pessimism

Retailers are warning of sluggish growth next year and possibly beyond as the impact of January's VAT rise hits consumer's pockets. Photograph: Dan Kitwood/Getty Images

It is with hope and fear that retailers view the coming months. There is hope that consumer confidence will not be too badly battered by next month's comprehensive spending review and that there will be a mini-boom, especially in big-ticket items, as shoppers head out to beat the increase in the rate of VAT which takes effect on 4 January.

And then there is fear – that even if they get through Christmas unscathed, then the increase in VAT in January, the impact of spending brought forward and the thump of festive credit card bills on the mat in February will snuff out all but essential purchases.

Last week, some of the biggest names in shopping – Lord Wolfson of Next, Michael Sharp at Debenhams, Ian Cheshire of B&Q group Kingfisher and Charlie Mayfield, chairman of John Lewis, all warned of sluggish growth next year and even beyond. Retailers, it should be noted, are never the most optimistic bunch. All work on the basis that it is better to under-promise and over-deliver. And all of the above have reported thumping profit increases.

But the impact of the rise could go either way. When Germany increased VAT from 16% to 19% in 2007 there was a mini-boom, but sales slumped afterwards. The impact, however, was fairly brief. As Neville Hill, economist at Credit Suisse, points out, 2007 was one of the strongest years for the German economy. He reckons there will be a fall-off in UK sales in January, which could be quite severe, and another hit in February. Sales should then resume their upward trend.

Hill believes last week's ONS retail sales data, with the first drop since January, was a blip and private sector jobs growth, which showed its strongest rise, will help restore confidence.

But that is far from assured. When VAT in Japan rose from 3% to 5% in 1997 retail sales fell off a cliff and spent three years in the doldrums. In the UK, where consumption is some two-thirds of the economy, that would be critical.